Academic Path Dependency

Keynesian Revolution

I try to sentence my more whimsical ideas to the more heavily trafficked confines of the Twitterverse, where they can be picked apart, digested, refined, and ultimately forgotten before I publish them on my much more permanent blog. Unfortunately, nobody took the bait this time. The question that serves as the focus of this post originates as much out of ignorance as it does out of whatever knowledge of the history of economic thought of the century between the rise of marginalism and the introduction of formalized rational expectations and dynamic equilibrium models I may enjoy. While I attempt to defend myself by underscoring my inquisitive intentions, I, by all means, prefer that people respond critically and without reservation.

The question: what unique insights did J.M. Keynes provide in The General Theory? Rephrased: had Keynes’ 1936 magnum opus not been written, what would have economics missed out on? I admit that, to one extent or another, this is really a query, since what motivates me is a thought that popped into my head yesterday. If much of Keynes’ thought was influenced by others, to the extent that he openly borrowed (and improved upon) many concepts already in circulation, what did he bring to the table to justify the fanfare his memory receives: whether as being remembered as the greatest economist of the 20th century, or as the founder of macroeconomics? (This last question is admittedly poor, because The General Theory wasn’t Keynes’ only contribution.)

I can think of a few examples of concepts in Keynes’ book that are at least more unique than not, but I really don’t know his influence and contemporaneous literature well enough to act as final judge. The clearest case is that of the liquidity preference theory of interest, which The General Theory (Keynes)non-coincidentally received quite a bit of criticism in the years following the book’s publication — including from soon-to-be Keynesians, such as Franco Mogdiliani. To be sure, there is a long list of terms Keynes developed: marginal efficiency of capital, aggregate supply price, the marginal propensity to save and consume, et cetera. But, oftentimes, these terms named ideas that had already existed in, more-or-less, the same form.

Many ideas he clearly borrowed, although he oftentimes improved upon them — at least, he “improved” them if those theories encapsulate your preferred flavor of economic reasoning. One immediately comes to mind: the multiplier. Here Keynes was explicit (p. 113) in borrowing from R.F. Kahn, formalizing it and expanding it to fit the book’s dual focus on employment and investment. Also, while his business cycle theory’s canary — the belief that as incomes rise, and savings increase disproportionately faster than consumption, the opportunities for investment will dwindle — was most likely his own, the underlying mechanism, which is monetary disequilibrium, was already widely accepted (I have a hunch that, here, Keynes was significantly influenced by K. Gustav Cassel).

In other cases, others in the profession were already publishing similar ideas. For instance, expectations were being written into models by economists like K.G. Cassel and Ralph G. Hawtrey. In fact, in a comparative piece by John R. Hicks — a pioneer of the Neoclassical–Keynesian synthesis — (“Hawtrey,” in Economic Perspectives; previously published as “Automatists, Hawtreyans, and Keynesians“) noted that Hawtrey had taken the concept of expectations much farther than Keynes, and much more consistently (Lachmann, in The Market as an Economic Process [1986], also lambasts Keynes for his inconsistent application of subjectivist themes). Likewise, others were also working on advancing the theory of uncertainty, including Frank Knight and Ludwig von Mises, although the former is probably more relevant than the latter for our purposes. Interestingly, these two form part of the “forgotten themes” that post Keynesians all-too-often petition us to “rediscover.” It’s also worth mentioning all the economists who claim to have foreseen the Keynesian Revolution (e.g. L. Albert Hahn), further solidifying the claim that many of Keynes’ “contributions” had already been contributed by others. Lastly, I remember reading that Hicks had claimed that much of his formalization of Keynes’ theory — immortalized in the smooth curves of the IS/LM diagram — was based more on his earlier work than on Keynes’ book. There is quite a bit of evidence to consider.

This post can easily be interpreted as arguing that there are no original contributions in The General Theory. Far from it! I’m asking you to fill me in. With this caveat re-emphasized, there’s two other aspects of the problem we ought to inspect. That is, there are two alternative ways that The General Theory may have influenced the profession.

First, the great appeal of Keynes’ 1936 book may have been the precise formula of the synthesis. That is, maybe Keynes’ contribution was not so much the development of the pieces, but fitting together the puzzle. The problem I have with this interpretation is that The General Theory wasn’t really accepted as a whole. Rather, it was picked apart and the profession adopted what it thought correct and relevant. Case in point, Keynes’ idiosyncratic general framework of industrial fluctuations, the aforementioned ill-conceived notion that there is a limit to profitable (in the forward-looking pecuniary sense) investment, was never really adopted. Pure monetary disequilibrium, I think, became the norm, popularized by Milton Friedman’s and Anna J. Schwartz’ well-known A Monetary History of the United States.

Second, Keynes’ book may have persuaded much of academia to pursue research in a specific direction, including by showcasing together a number of theories that had been published throughout journals which already carried a bit of currency. In other words, perhaps Keynes popularized certain concepts, pushing the profession to mold their worldviews around them. This includes the rise of the multiplier, now an indispensable part of modern mainstream macroeconomics, and the tripartite decomposition of markets: assets/money (LM), labor (Ȳ), and the “real” economy (IS). But, this paints The General Theory almost as a deus ex machina. Keynes himself was heavily influenced by his peers, including Kahn, Hayek, Hawtrey, Robinson, and many others. Similarly, the general framework was already surfacing: the paradox of thrift, the theory of the multiplier, and even theories that suggested that governments — with the aid of mathematics and economists’ models — could replicate the resource allocation of markets.

Most likely, there are elements of these last two theses at play. However, I’m more certain that, out of ignorance, I’ve focused too much on all that may not be Keynes’ own, without paying proper attention to what was unique. Educate me.

[Edit: Here is Daniel Kuehn on the question.]

  • George Machen

    I saw your tweet, and had started to reply, “Foster and Catchings,” but I said to myself, naw, why bother, you’ll cover them, but they’re nowhere to be found.

    • JCatalan

      I had them in mind when I wrote “paradox of thrift,” but only because I know them through Hayek’s critique of their doctrine in “The ‘Paradox’ of Saving.” Otherwise, I don’t know their work well — I’ve read that their contributions were mostly marginalized.

      • George Machen

        Probably more honest to say that F&C during the 1920s advocated the spend for prosperity schemes of what later the bastardizers of Keynes foisted in his name.

  • JP Koning

    David Laidler’s Fabricating the Keynesian Revolution, an excellent book, is very much along the lines of your question.

    You can already see liquidity preference theory in Alfred Marshall, Fred Lavington and Pigou, who begin to talk about the demand to hold a stock of money. Pigou and Lavington explicitly describe the price of money as the interest foregone.

    One thing that is truly unique in my opinion is Keynes on the liquidity premium. But no one really went anywhere with that anyways.

    • JCatalan

      What are the differences between the liquidity preference theory and the liquidity premium? Or, do you mean that Keynes took the idea of liquidity preference to develop his theory of what drives the term structure of interest rats?

      • JP Koning

        Let me put it differently. Prior to Keynes, economists talked about a demand for some item M. Keynes generalized this to a demand for some feature called moneyness (although only as a footnote in his text). All items have varying liquidity premiums. Yes, this idea helps to describe the term structure of interest rates. But even in a barter world with no credit (and therefore no term structure) Keynesian liquidity will be an important determinant of relative prices.

        • JCatalan

          This sounds similar to the “spontaneous” theories of money, where a good’s growing liquidity induces the development of a demand for it solely because of its status as a liquid asset.

          • JP Koning

            I’ve looked for the idea of a liquidity premium in Menger and early Mises and have never found it. It’s almost on the tip of their tongues, though. Mises brings it up in Human Action.

  • Blue Aurora

    Regarding David Laidler’s book…Dr. Michael Emmett Brady has a review of it.

    As for Joan Robinson, I have told you before that there has been discussion about the role of the Cambridge Circus in the development of The General Theory. It’s entirely possible that R.F. Kahn and Joan Robinson embellished the truth regarding their role in the development of the GT.

    Keynes’s treatment of uncertainty was certainly a novel part of his magnum opus, and to fully understand his treatment of uncertainty, there are two footnotes in the GT that refer to A Treatise on Probability (1921). The mathematical formulations of the TP are in turn based off the mathematical formulations found in George Boole’s An Investigation of the Laws of Thought (1854).

    For more information, I refer people to the following paper, which is going to be published in a special issue of the Italian journal History of Economic Ideas.

  • PrometheeFeu

    I think the enterprise you propose cannot help but focus on the parts which Keynes found somewhere else. After all, while many people can contribute to the knowledge that X, Y or Z can be found in some previous work, very few people can actually say: I know all of economic history and there was nobody before Keynes who said this.

    • JCatalan

      This is a very good point. Also, it’s easy to say that an idea bears resemblance to an old one and miss the subtle, and perhaps important, differences.

      • PrometheeFeu

        Not to mention that somebody who made a bad argument for a good idea did not further the field any more than someone who did not discover the same idea.